Saturday, October 13, 2007

IRELAND: ROBUST GROWTH AND PROPERTY MARKET ANTICIPATION

In a decade, Ireland's property prices grew rapidly together with a robust growth of income, unemployment and population, the source of which has been a growing immigration of unskilled labor. Strong demand explains this exactly. For example, annual housing completion grew five-times faster than in the beginnings of 1990s. Due to the fact that housing price ratio to average income is the second highest in the OECD, this is a clear example of price overshooting. On the other side, the size of household indebtedness approached to nearly 100 percent of the GDP while mortgage debt is risky due to variable interest rates and friction in the money market. Expecting higher prices in the years to come, the investors inflow in housing market increased as well.

In case if market cooling continues to advance faster, it is quite likely that Ireland may experience a sharp decline in property prices due to the fact that borrowers continue to see a widening gap between housing rents and repayed mortgages. On the side of the investment, continually adjusted holding of property may be assumed on the expected values of the capital gains in the future. If this happens, the cooling could trigger declining expectations and rush the property offerings at a lower price; of course, to avoid the anticipated shocks in the market.